The displaced exponential Vasicek mean-reverting model and the Hull-White one-factor model are investigated and compared in terms of their simulated interest rates and the resulting credit exposures of a representative portfolio from Rabobank. This research aims to provide insights into how the credit exposure of interest rate derivatives are impacted by the choice of different interest rate models under the current low-interest-rate environment. Under a forward rate framework and historical calibration, this research compares the performance of an endogenous and an exogenous interest rate model. The simulated interest rates from the two models demonstrate the respective distributional properties. For interest rate derivatives with relatively short maturities, both model generate similar levels of credit exposures for payer interest rate derivatives. For receiver interest rate derivatives, the displaced exponential Vasicek mean-reverting model generates lower credit exposures compared to the Hull- White model.

Lange, R.
Erasmus School of Economics

Wu, S. (2020, June 25). Impact on Counterparty Credit Exposure from Negative Interest Rate Models. Econometrie. Retrieved from